Chapter 17. Cash flow statement

Question 1

The cash flow statement classifies cash receipts and cash payments into three types of activities: (1) operating, (2) investing, and (3) financing activities. Describe the transactions and other events for each kind of activity:

Answer 1

1. Operating activities include the cash effects of transactions that create revenues and expenses. They affect profit and generally relate to changes in noncash current assets and liabilities.
2. Investing activities include (a) purchasing and disposing of non-trading investments (including non-trading short-term investments) and long-lived assets, and (b) lending money and collecting the loans. They generally affect non-current asset accounts. Note that generally accepted accounting principles require the purchase and sale of trading investments to be included in operating activities and not investing activities.
3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from shareholders and paying them dividends. Financing activities generally affect non-current liability and shareholders’ equity accounts.

Question 2

Cash receipts and payments are?

Answer 2

Cash receipts are inflows and cash payments are outflows.

Question 3

Describe the cash receipts and ash payments from operating activities, investing activities and financing activities.

Answer 3

OPERATING ACTIVITIES
Cash receipts: 
- From the sale of goods and services
- From returns of debt investments (interest) and on equity investments (dividends)
Cash payments:
- To suppliers for inventory
- To employees for services
- To governments for taxes
- To lenders for interest
- To others for expenses

INVESTING ACTIVITIES
Cash receipts:
- From the sale of property, plant and equipment and intangible assets
- From the sale of non-trading debt or equity investments
- From the collection of principal on loans from other companies
Cash payments:
- To purchase property, plant, and equipment and intangible assets
- To purchase non-trading debt or equity investments
- To make loans to other companies

FINANCING ACTIVITIES
Cash receipt
- From the sale of shares (preferred and common)
- From the issue of debts (notes and bonds)
Cash payments:
- To shareholders as dividends
- To redeem long-term debt or reacquire shares

Question 4

How are interest received and paid and dividends received and paid classified under ASPE?

Answer 4

Private companies reporting under ASPE must classify interest (received and paid) and dividends received as operating activities. Under ASPE, dividends paid are classified as financing activities. Although public companies have a choice under IFRS as to how to classify interest and dividends, most public companies follow the classification required under ASPE.

Question 5

Not all of a company’s significant investing and financing activities involve cash. The following are examples of significant noncash activities:

Answer 5

1. Issue of debt to purchase assets
2. Issue of common shares to purchase assets
3. Conversion of debt or preferred shares to common shares
4. Exchange of property, plant, and equipment